S&P cuts oil price assumptions for first time in three years

Standard & Poor's has cut its assumptions for near-term crude oil prices for the first time in three years, adding edge to its recent warning of risks to the oil and gas sector due to maturing debt.

The ratings agency slashed $US10 a barrel from its expectation for Brent crude this year, to $US55 a barrel and trimmed its 2020 assumption by $US5, also to $US55. It citied an "abrupt reverse" in sentiment in the market from just a few months ago – when "soothsayers" were calling for oil to reach $US100 a barrel – because of the ongoing trade war between the US and China; China's economic slowdown, which has led to worries about the outlook for demand; and a continuing increase in US production.

The revisions to the assumptions, which are used to assess the creditworthiness of companies in the sector, mean S&P now assumes flat pricing through to the long term, given it retained its long-term assumption for Brent.

Oil prices are assumed by S&P to be flat for some time. SUE OGROCKI

The downward adjustment in oil prices is the first by S&P since January 2016 and follows six increases.

Brent prices have slid dramatically over the past three months, from north of $US85 a barrel in early October to about $US50 by Christmas. Prices have since only partly recovered, with Brent trading at about $US56 a barrel on Friday.

Advertisement

S&P in November assessed the outlook for the whole oil and gas sector as "broadly stable", with a "somewhat negative slant" for oilfield services and contract drilling sectors. However, it named prices as the No.1 risk.

"Over the medium to longer term, the sector has a significant amount of debt maturing over the next couple of years and any substantial drop in prices could lead to another round of defaults and bankruptcies," it said then.

Australian producers such as Santos and Origin Energy, which were caught out by the 2014-15 slump in oil prices and saw debt levels swell, have since put a priority on reducing borrowing. They are both still rated at BBB-, the lowest investment grade, with a positive outlook for Origin and a stable one for Santos. Woodside Petroleum is rated BBB+ with a stable outlook, but has the heaviest upcoming capital spending program given its plan to move forward on the $US11 billion Scarborough gas project and the $US20.5 billion Browse project, both in Western Australia.

"Where the Australian players do benefit is they have stronger balance sheets and their increased operational focus in recent years has meant that they've been able to materially drive down their cost profiles, in that their break-even cost positions are below $US40 per barrel," said S&P analyst Minh Hoang in Sydney.

He noted that in contrast to the 2014-15 price downturn, Santos's and Origin's new liquefied natural gas plants are now operational, reducing any pressure on the balance sheet from weaker prices.

"From a ratings perspective, where the next pressure point could come will be once the current players look to enter into the development phase again because that's the time they will be utilising a lot of the cash generation and balance-sheet strength they currently have," Mr Hoang said.

In explaining its downgrades to price assumptions, S&P said expected growth in US production effectively undercuts efforts by OPEC to balance the market. It noted that marginal production costs in US shale have fallen significantly because of improved drilling efficiency and well techniques, and that many operators are targeting at least flat or lower unit costs.

Advertisement

Still, some others are more bullish on prices. Bernstein Research said on Friday it expects Brent prices will rally to average $US70 a barrel in 2019, 2020 and 2021 before rising to $US74 in 2022.